A recent Italian judgment in the Tribunal of Palermo has offered an insight into how the Italian courts will assess whether a franchisor can validly terminate a franchise agreement for delayed payments by the franchisee.

Background

The parties entered into a franchise agreement in 1998. The terms of the agreement provided the franchisor with a right to terminate immediately in the event of breach by the franchisee of certain specified contractual obligations, including the franchisee's obligation to pay for products purchased from the franchisor within 90 days of the invoice date.

During the term of the agreement, the franchisee began to fail meet its payment obligations under the agreement. Despite the fact that a termination event had been triggered under the agreement, the franchisor accepted the franchisee's delay in making payments. This eventually led to the accumulation of significant debt.

Some of this debt was reduced by a payment plan which was agreed between the parties in June 2004. In spite of the payment plan, the franchisor then terminated the agreement in July 2004, citing the franchisee's failure to make payment for the products within 90 days of invoice as agreed.

The franchisee disputed the termination on the basis that the franchisor had been accepting the delayed payments. It was argued that the franchisor had therefore waived its right to terminate and implicitly agreed to vary the payment terms of the franchisee agreement.

Decision

The Court followed a decision of the Italian Supreme Court (Cass. No. 3964 of 18/3/2003) and held that, whilst the tolerance of repeated breaches of contract is consistent with the fairness and good faith principles of the Italian Constitution and Civil Code, such tolerance does not justify the breaches by the franchisee of its contractual obligations and should not be regarded as a waiver of the franchisor's contractual rights nor an implied variation of the agreement.

The franchisee was therefore unsuccessful in its claim.

In the current difficult economic climate, it is common for franchisees to fall behind with payments to their franchisor and it is only fair and ethical for a franchisor to assist and support its franchisees.

However, such support and tolerance of late payments can cause uncertainty when the franchisor decides that it can no longer support the franchisee and the relationship needs to be terminated.